Freedom of choice of EU courts?
(Urgent commentary on the CJEU – First Chamber – judgement of 8 February 2024, Case C-566/22 “Inkreal” CURIA – Documents (europa.eu))
In its recent judgment of 8 February 2024, the Court of Justice of the European Union (“CJEU”) has concluded that there is no impediment to the parties to a contract established in the same EU Member State (e.g. Spain) being able to agree on the jurisdiction of the courts of another Member State (e.g. Germany) to settle their contractual disputes, even if the contract in question has no other connection with the designated Member State. The doctrine established by the CJEU, perhaps questionable in some respects, opens up interesting prospects for companies to choose the dispute resolution mechanism that suits them best, even in purely domestic contractual relations.
Between June 2016 and March 2017, an individual (“FD”) residing in Slovakia lent money to the Slovak company Dúha reality s.r.o. (“Dúha”). The two loan agreements signed between the parties contained a clause whereby the parties agreed that any disputes arising from the loans would be settled “by a court of the Czech Republic having substantive and territorial jurisdiction”.
In early December 2021 FD transferred the claims under the loan agreements in favour of Inkreal s.r.o. (“Inkreal”), a company also incorporated under Slovak law and established in Slovakia.
Since Dúha did not repay the loans, Inkreal sued Dúha before the Supreme Civil and Criminal Court of the Czech Republic at the end of the same month of December, as foreseen in the above mentioned clause.
Doubts then arose as to the possible invalidity of the above-mentioned attribution agreement. Since the dispute concerned a contract governed by Slovak law and was between two Slovak companies, with no connection to the Czech Republic, the Court questioned its possible lack of international jurisdiction. In view of the doubts that arose, the Czech Supreme Court turned to the CJEU for clarification.
In simplified terms, we can start from the idea that the jurisdiction of the courts of the EU Member States can be conferred in three ways: by virtue of certain Community rules, by international treaties signed by the Member States or in accordance with the internal rules of the States themselves. Given the principle of the primacy of Community law, this allocation of jurisdiction takes place according to a hierarchical order. Thus, where the possible jurisdiction of the courts of a State can be determined by a Community rule, the national provisions are displaced and are not applicable.
In the case before the CJEU, which concerns a contractual dispute, the Community law whose application is at issue is Regulation (EU) No 1215/2021 (“Brussels I bis Regulation”) on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. Article 25 of that Regulation allows, subject to certain conditions, clauses conferring jurisdiction on the courts of the Member States.
The Czech Supreme Court’s doubts arise from the fact that neither the loan agreements nor the disputing parties have any connection with the Czech Republic. However, the case-law of the CJEU has consistently required that there be an “international element” in the disputes in order for the Brussels I bis Regulation to apply. Thus, the referring court wonders whether the mere will of the parties, by including a clause submitting to the courts of another State, is sufficient to confer an international character on their contractual relationship. If that is not the case, the situation would be purely internal and the Community regulation would not be applicable. In such a case, the possible jurisdiction or lack of jurisdiction of the Czech courts would have to be examined in the light of the internal rules of the Czech Republic itself.
Conclusions of the CJEU
In addition to hearing the arguments submitted by the parties involved and analysing the Opinion of the Advocate General (who expressed a view contrary to that reflected in the judgment), the CJEU also took into account the observations submitted by the European Commission and some States that wished to participate. The CJEU concluded that a jurisdiction agreement by which the parties to a contract established in the same Member State agree that the courts of another Member State shall have jurisdiction to hear disputes arising out of that contract falls within the scope of Article 25(1) of the Brussels I bis Regulation even if that contract has no connection with that other Member State.
Reasoning of the CJEU
The CJEU reaches the above conclusion using reasoning that is questionable in some cases but imbued with an undoubtedly practical sense. Although the CJEU insists on its settled case law to the effect that the application of the jurisdiction rules of the Brussels Ia Regulation requires the existence of an “international element”, the truth is that the final decision greatly relativises this requirement.
According to the CJEU, the dispute between Inkreal and Dúha falls within the definition of the concept of a “cross-border case” since the parties are established in a Member State other than that to which the Czech court seised on the basis of the agreement conferring jurisdiction in question belongs (Recital 23). The CJEU adds that the fact that the main dispute raises a question concerning the determination of international jurisdiction (that of the Czech Supreme Court) reinforces the idea of the existence of a cross-border element (Recital 24).
Recital 25 of the judgment contains the key to the CJEU’s decision in determining that “the existence of an agreement conferring jurisdiction on the courts of a Member State other than that in which the parties are established in itself demonstrates the cross-border implications of the dispute in the main proceedings”. In this way, the CJEU opens the way for the parties to a contract to decide, solely by their own free will, to “internationalise” a situation that from any other point of view would be considered purely internal.
To justify its view, the CJEU relies on eminently practical reasons: maintaining that the clause on submission to foreign courts is covered by the Brussels I bis Regulation allows the plaintiff and the defendant to easily determine the court before which they can sue and be sued, and it also allows the court seised to easily rule on its own jurisdiction. According to the CJEU, the alternative of the court having jurisdiction being determined in accordance with the national rules of private international law of the Member States concerned would lead to greater legal uncertainty, since the application of different national rules could lead to divergent solutions.
Commentary and possible implications
Until now, in contractual matters, individuals could “internationalise” a domestic situation with regard to the law applicable to their contract. Indeed, Article 3(1) of Regulation (EC) No 593/2008 (“Rome I Regulation”) gives a wide freedom of choice of the law applicable to contracts by stating that “the contract shall be governed by the law chosen by the parties”. Thus, in principle, even the parties to a purely domestic contract can choose a foreign law. Notwithstanding this freedom of choice of law, Article 3(3) of the same Rome I Regulation provides for a corrective mechanism to prevent possible abuses or excessively opportunistic choices: if all the relevant elements of the contract (e.g. the place of establishment of the parties, the place of performance of the services or delivery of the goods, etc.) are located in a country other than the country whose law is chosen, the mandatory rules of the first country will continue to apply. Thus, in purely domestic contracts the foreign law chosen by the parties will only apply in those respects in which the law to which the contract is objectively linked does not contain mandatory rules. Article 3(4) of the Rome I Regulation provides for an identical limitation for purely intra-EU cases: if all the elements of the situation are located in two or more EU Member States and the parties choose the law of a third State, such a choice does not prejudice the application of mandatory rules of Community law.
The restrictions provided for in the Rome I Regulation on the law applicable to the contract are not transferable to forum selection clauses. In fact, in its decision, the CJEU has not imposed any kind of limitation on the choice of the courts of another Member State (beyond the restrictions on exclusive and protective forums or those relating to public policy provided for in Article 45). Thus, two or more companies located in the same Member State and concluding a purely internal contract can now decide that any disputes between them will be settled by the courts of a different Member State. And it should be remembered that, by submitting a case to the courts of another Member State, the latter acquire exclusive jurisdiction to hear the case, unless the parties have agreed otherwise.
Until now, in order to transfer a purely domestic dispute to another State, the parties had the mechanism of arbitration at their disposal, agreeing that the seat of the arbitration tribunal would be in another country. With the new doctrine set by the CJEU, the parties may also opt for the ordinary courts of another EU Member State if they consider it appropriate, whether for reasons of speed, efficiency, cost, specialisation or any other reason. Obviously, before making a decision, other aspects must be taken into account, including possible adverse elements such as language difficulties, the added complexity involved in making notifications or taking evidence abroad or even the problems arising from the need to prove to the foreign judge the content of the substantive rules chosen by the parties if these rules are not those of the designated judge.
A final caveat: the doctrine laid down by the CJEU only covers situations where the parties have chosen the courts of a Member State of the EU. This doctrine does not apply to cases in which the designated courts belong to third States. In such cases it will be necessary to refer to the applicable international conventions or domestic rules of private international law to determine the validity or invalidity of the clause in question. Just by way of example, the Hague Convention of 30 June 2005 on Choice of Court Agreements, in force for Spain, makes it clear that “a situation is international unless the parties are resident in the same Contracting State and the relationship of the parties and all other relevant elements of the dispute, regardless of the location of the chosen court, are connected only with that State”. Thus, the parties cannot rely on the provisions of the Convention in purely internal situations.